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TCS’ profit warning spooks IT stocks, top 5 lose Rs 34K crore in m-cap
MUMBAI: Concerns over weak revenue guidance by India’s largest software services exporter, TCS, spooked IT stocks on Thursday, with the top five companies in the
MUMBAI: Concerns over weak revenue guidance by India’s largest software services exporter, TCS, spooked IT stocks on Thursday, with the top five companies in the sector losing around Rs 34,000 crore in market value, as investors saw the company’s outlook as a reflection of the general state of the IT sector.
In a filing to the stock exchanges, Tata Consultancy Services (TCS) said some of its customers — particularly in the banking financial services and insurance (BFSI) vertical — are holding back on discretionary spending. “Based on data at the end of August 2016, the company has characterised customer outlook as one marked by abundant caution, with some holding back of discretionary spending — particularly in the BFSI vertical in the United States — resulting in a sequential loss of momentum.”
BFSI accounts for around 40% of the company’s total revenues.
TCS shares plunged 5.1% on the Bombay Stock Exchange (BSE), a six-month low, eroding ₹24,798 from the company’s market value. At the end of the day’s trade, the market capitalisation of the most valued stock on the BSE stood at ₹4,57,366 crore.
Taking a cue from TCS, HCL Technologies declined 1.7% , and Wipro and Infosys fell 1.8% and 1.6%, respectively.
Thursday’s statement by TCS is in contrast to CEO N Chandrasekaran’s remarks in a post-earnings conference call with analysts in July, where he had said that the “pipeline looked good”, and there was no negative news to report.
TCS’ Nasdaq-listed rival Cognizant Technology Solutions had last month cut its full-year revenue growth forecast sharply. Bangalore-based Infosys, too, had earlier reduced its full-year revenue guidance.
Earlier, Mindtree also issued a profit warning and lowered its revenue guidance for the second quarter on account of project cancellations, cross-currency movements and slower ramp-up in a few large clients across different verticals.
Analysts have been expecting some impact of Britain’s decision to leave the European Union on IT companies’ growth in the UK, since the country accounts for around 40% of the sector’s revenues.
“We see this commentary as incrementally negative for the company and the sector. The second quarter of 2016-17 will also have a 100 basis point constant currency impact due to the sharp depreciation in the British Pound. The momentum in the second half is expected to be weak anyways due to seasonality and expected impact of Brexit. So overall, it paints a rather gloomy picture for 2016-17 in terms of both growth and margins,” said Vibhor Singhal of Phillip Capital.
Analysts expect TCS’ margins to remain flattish due to revenue growth pressures and currency headwinds.
“Slower revenue growth momentum and cross currency headwinds would also delay any reversal in margin trajectory after a soft first quarter (25.1%). We see downside risk to margin guidance of 26-28% after an estimated first-half average of 25%,” said Shashi Bhushan of IDFC Securities.
Bhushan has cut earnings forecast on TCS for 2016-17 and 2017-18 by 3% to 4% and expects the stock to remain under pressure in the near-term.
Religare Institutional Research expects TCS’ second quarter revenue to grow 1% to 2% in constant currency terms, compared to 3.1% growth in the first quarter.
